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Shares of sugar companies rallied up to 10 per cent on Friday, extending their previous day’s gains on the BSE after the government approved Rs 10,540 crore soft loans to help sugar mills clear cane arrears.

According to a PTI report, the government on Thursday announced a soft loan of up to Rs 10,540 crore to the sugar industry to help mills clear mounting arrears to cane growers, a move that would cost exchequer up to Rs 1,054 crore as interest subsidy.

The decision to provide soft loans comes a fortnight after the Centre raised benchmark selling price of sugar at factory gate by Rs 2 to Rs 31 per kg.

In the last one-and-a-half years, the central government has taken a number of measures to bail out sugar mills as well as cane farmers. The steps include doubling of the import duty on sugar to 100 per cent and scrapping of the export duty, added report. CLICK HERE TO READ FULL REPORT

The hike in minimum selling price of sugar by 7 per cent to Rs 31 per kg from Rs 29 per kg, approved by the union cabinet recently, is expected to address the profitability and liquidity issues of sugar mills, and ease their cash crunch, thereby enabling payment of accumulated arrears to sugarcane farmers.

According to rating agency CRISIL, Ebitda (earnings before interest, taxation, depreciation and ammortisation) margins are expected to improve by 200-300 basis points for mills in the north and by 300-400 basis points (bps) for those in the south, given that cost of cane is lower in the region. However, stagnant cane costs and higher sugar prices would enable mills in the north to make higher margins compared with their southern peers.